Fearsome predator

Amazon.com is stressing price, convenience and selection to capture traditional grocery customers. Center store, nonfoods and even fresh items are at risk.

A generation ago, grocery retailers lamented about how Toys “R” Us had stolen much of their sales in the baby and diaper categories by combining those sections with its toy business. Later, many of these same retailers complained about how the mass merchandisers were stealing sales by stressing pricing.

Today, those challenges seem like small potatoes compared to what they face from Seattle-based Amazon.com, the digital behemoth that is threatening all traditional retail with a formula that stresses price, selection and convenience married to technologies that make it fun and easy to shop.

“Amazon is the big bad wolf of the retail industry,” says one supermarket retailer. “It is capturing market share by being everything to every consumer and I fear it will only get worse as more suppliers sign on to the Amazon program and the company develops new strategies to get product to consumers faster.”

It appears that many traditional retail operators, including grocery store executives, fear Amazon. The 20-year old company has made so many strides into different categories that brick-and-mortar operators are holding their collective breathes and hoping that their market niche is not next on its list.

So how is Amazon impacting the supermarket business right now? The jury, many say, is still out. The company has made dramatic strides in several key categories, specifically diapers, where it holds an 11% share of sales, and paper products. With the testing of same-day service, including AmazonFresh in Seattle and Wag.com, its pet products site, many industry officials worry that the company is closing in on a business strategy that could serious hurt supermarket chains in urban and high-density and affluent suburban areas.

Wag.com is one segment of the Amazon business that has many other retailers nervous. The company is obviously going after the massive pet food segment by offering a wide range of products at low price points. As word spreads, many think that Wag.com could do to the pet category what, well, Amazon did to the book category. And that is not good for other retailers.

Other segments, including the cereal, canned goods, snacks, candy, other paper products and baby care departments, are also at high risk. “The big bulk categories are particularly vulnerable because they can offer consumers a real saving by purchasing through Amazon,” says one observer. “On the other hand, I do not believe that other segments, such as the fresh business, are really in jeopardy from Amazon now or in the near future.”

Up until now grocers’ brick and mortar business has been solid, mostly withstanding Amazon’s huffing and puffing. Yet, as Amazon continues to push, cracks in some food retailers’ foundations are beginning to show. With the enormous pressure already being placed on supermarkets by the mass, drug, club and dollar channels, an online attack is the last thing grocers need. However, that is exactly what is on the horizon.

More buying groceries online
Although still a small part of the pie, online grocery sales are becoming more prevalent and Amazon is poised to capture a sizable share. In the spring of 2012, Kantar Retail and Compete Online Intelligence, a Kantar Media company, conducted a joint survey that revealed in the three months prior to the survey, of the shoppers that made any kind of online purchase, 11% were for groceries. Of those 11%, 56% made purchases from Amazon.
“While online grocery today is very fragmented, with limited ability in a few geographic areas, this shows that there is a shopper demand in the marketplace today that grocery retailers, for the most part, aren’t meeting,” says Anne Zybowski, vice president at Boston-based Kantar Retail.

Take laundry detergent, a product that consumers need to restock regularly. Amazon has the ability to offer its shoppers these, as well as other shelf-stable items, on an auto-replenishment basis. Over time as shoppers—particularly newer, younger shoppers—appreciate this and other convenience type services, Amazon will gain their trust and their business, say observers.

“The grocery e-commerce business is small today, maybe 2%, but many of the retailers we talk to are predicting that it is going to double in the next five years,” says Paul Weitzel, managing partner for Willard Bishop, based in Barrington, Ill. “Most believe that it is here to stay and there are some that we have talked to that think a lot of the commodity type products and categories will end up going on sort of an auto buy. That will be a great environment for somebody like Amazon. A lot of people think that is going to be the future and if that is the case, an Amazon would be a perfect candidate to make that happen.”

Some observers say the auto-buy/replenishment model is not too far off. When it does become the norm, supermarkets will most likely have to adapt to it—swiftly and boldly.
Sandy Skrovan, U.S. research director for Chicago-based Planet Retail, says as more and more of these types of products are purchased online, particularly bulky, larger items that take up valuable shelf space, retailers may have to rethink and reconfigure how they use the space within the store.

“As some of the center store areas shrink, perhaps retailers can use more of the store space as a ‘backroom fulfillment center’ for some of the site-to-store type of programs we expect retailers to be experimenting with,” Skrovan says.

She adds that beyond developing an online service, retailers must better connect with their shoppers in order to retain existing customers. Much of that includes creating an interactive dialogue with their best shoppers, making them feel unique and personalizing their trip a bit better.

Kroger has been a forerunner in personalizing the shopping experience with the different offers and deals it provides its’ loyalty card members. Companies such as Safeway, Wegmans and Harris Teeter are moving in that direction as well.

“We are going to see a lot more personalized deals being offered,” says Skrovan. “For example, if Kroger is going to offer me to come into the store and buy diapers for a couple bucks cheaper than I can at Amazon, of course they are more than likely going to retain my business. But they are going to have to do that on a regular and ongoing basis. We are going to see a lot more of retailers getting to know their best shoppers, making sure they are not losing that core group that comprise most of their sales.”

Getting fresh
Even the fresh section could be vulnerable in the future, a trend that would surely damage the supermarket business model. “Online merchants like Amazon have made inroads in the center store but should not be underestimated in their ability to move into the perimeter departments,” says Peter Larkin, president and CEO of the National Grocers Association (NGA), based in Arlington, Va. “Brick-and-mortar retailers need to be aware and develop strategies to maintain their advantage in fresh.”

By most accounts, AmazonFresh, which serves the greater Seattle area, providing consumers with same or next day service of a full selection of fresh groceries including produce, dairy, meat and seafood, has fared quite well. Some observers say that it is probably only a matter of time before Amazon attempts to offer AmazonFresh in different markets.

There are hurdles—some very significant—to offering not only same day fresh service, but food in general, that Amazon must overcome, say observers. One of the biggest questions raised is the way Amazon is currently situated. Does it have the in-house expertise and the ability to learn how to handle perishables?

‘When you start talking about fresh, and prepared foods as well, Amazon has a long learning curve to go through,” says0 Jim Wisner, president of the Wisner Marketing Group, based in Libertyville, Ill. “As long as they are slow and cautious, and they understand they are not going to reinvent the industry, but can create a very profitable niche for itself, they will do okay. Amazon is a big company, a smart company and they have got a lot of good systems. They just need to come up with a model that will work.”

Another issue is simply the business of selling food online. “E-commerce by its own nature is deflationary on pricing,” says Virginia Morris, vice president of consumer strategy and insights for Stamford, Conn.-based Daymon Worldwide. “Amazon already has a very low margin business. In grocery, the shrink that comes with getting into fresh and the supply chain logistics, makes it extremely complicated as they look to expand.” She uses Fresh Direct as a barometer, and the length of time it took that company to expand its delivery reach.

“As a technology-based logistics driven company, I would offer up that Amazon may have to partner with or acquire the retail savvy that the grocery industry has to manage shrink and manage a fresh supply chain,” says Morris.

Then there is the logistics of actually delivering the food. Here is where traditional groceries have a leg up on a company like Amazon—if for no other reason than potential length of delivery routes.

Grocers that offer e-commerce today are most likely picking up from the store and delivering within a five-mile radius, says Willard Bishop’s Weitzel. If Amazon is picking up from a warehouse or a dark store, it can be quite a distance from where it needs to be delivered, keeping a truck on the road for quite a while, raising the possibility of delivery issues.

“If you get just one or two houses out of sync, it can create havoc,” says Weitzel. “It is a lot easier to put a television on a truck and ship it 100 miles than to put a grocery basket—at a much lower margin—and ship it 100 miles.”

Many believe that until Amazon is able to expand and acquire new distribution centers, they are best suited to succeed primarily in densely populated urban markets.

Order engine
Some say there are other options that Amazon can explore to grow its grocery business. At its core, Amazon is basically an order engine, thus the opportunity exists for the company to partner with local grocers, creating a system similar to what is in use for Amazon’s other product lines. In that model, observers say Amazon may actually benefit some local and independent grocers.

Another potential hurdle for Amazon is that a great deal of people still enjoy and want to go grocery shopping. For many consumers shopping has become a major part of the entire meal planning process. While most shoppers roll through the store with a pretty good idea of what they want to buy, many are still enticed by what they see once inside. It can be very hard to duplicate that experience online.

“The supermarket has evolved over the years from a place where customers purchased staple foods to an ‘experience’ that is sensual and entertaining,” says NGA’s Larkin. “People are beginning to rediscover food and are willing to experiment with new things. The brick and mortar grocery store is an integral part of that experience.”

In this age of technology and automation, the “human factor” should not be discounted either. “People appreciate having a friendly and knowledgeable grocer to answer questions such as how to best prepare a rump roast or the best piece of fish for grilling,” adds Larkin.

As the online grocery continues to find its niche, some observers suggest Amazon, as well as traditional retailers look toward Europe and the click and collect concept for guidance. In the click and collect model, consumers order online and then pick up and a collection point. Wisner says major retailers such as Tesco and Carrefour utilize the concept to some degree and have found success.

Most observers do not believe Amazon is ready for the click-and-collect concept quite yet, primarily because they do not have enough volume. As Amazon’s food business gets big enough, observers say the click-and-collect concept becomes much more of a possibility. No matter the format, observers agree on one thing: Amazon is in the grocery business for the long haul.

“Amazon is going to be another retailer that is going to offer groceries that is just going to pick off another little piece of an existing food retailers business,” says Weitzel. “It is not going to be half of it but they are going to take a slice.”